Has OSFI got what it takes to oversee Canada’s housing agency?

One view is that Canada avoided the financial crisis because of the strong oversight of the federal banking regulator, the Office of the Superintendent of Financial Institutions. When Wall Street firms were swapping around risky credit derivatives in the bubble years, OSFI warned the banks and insurers in this country to stay away, so when the music stopped in 2008, they had only limited exposure.

Now Ottawa wants to further buttress Canada’s financial system by putting the Canada Mortgage and Housing Corp., one of the largest financial institutions in the country, under OSFI’s rule.

But remember, OSFI already oversees all the domestic and foreign banks, the biggest insurers and many of the pension funds — more than 60 organizations. Over the past three years it has gone from a barely visible arm of the Department of Finance to the country’s top financial cop with a highly visible presence, not just in Canada but also internationally. It’s been bulking up on staffing and making greater demands on firms it oversees. That’s an enormous evolutionary jump.

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The question is, is it wise to load OSFI down with significantly more responsibility at a time when it’s already got its hands full. The global financial system is once again at risk of meltdown. The United States, the world’s biggest economy, is struggling under trillions of dollars of debt that it realistically can’t hope to repay and the eurozone is sinking deeper into its own debt crisis.

Meanwhile, the Canadian housing market is, according to many observers, looking more and more like a bubble, partly due to the CMHC that has backstopped nearly 60% of outstanding mortgages in Canada, packaging up a large proportion for sale to investors around the world.

“For some time now I’ve had concern about the large commercial role that CMHC now plays… so we’ve been looking at the governance of CMHC and engaged [OSFI] to do some work on the CMHC, some analysis,” Jim Flaherty, the Finance Minister, told the National Post editorial board on Friday. “The situation with CMHC is we just want to make sure we have a good handle on what they’re doing over there…”

In the event the bubble pops, the mess will end up on OSFI. Let’s hope the regulator has what it takes to deal with it.

Clearly, there is an issue with oversight at CMHC. Issuance of default insurance has exploded in recent years, leaving taxpayers on the hook for potential losses. Leaving aside the question of how it remained under the Minister of Human Resources and Skills Development for so long, you have to at least ask how CMHC’s board of directors came to be dominated by real estate industry players. Something needs to be done, but bringing in OSFI may not be the best solution at this point.